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The New York State Department of Taxation and Finance has recently released draft Article 9-A regulation amendments under corporate tax reform pertaining to apportionment. Corporate tax reform draft regulations: Apportionment, N.Y.S. Dep't of Taxation and Fin. http://www.tax.ny.gov/bus/ct/corp_tax_reform_draft_ regs.htm. The draft is a comprehensive overhaul of most of the existing apportionment regulations, principally to reflect apportionment rules under the new law that went into effect in 2015. The Department has previously released draft regulations dealing with the sourcing of digital products and other business receipts and discretionary adjustments to the apportionment factor.

Among the areas covered by the draft regulations are:

General apportionment rules. The draft regulations introduce the definition of "business receipts" includable in the apportionment factor a term not defined in the Tax Law as constituting receipts received in the regular course of a corporation's business. Business receipts from sales of real, personal, or intangible property that "arise from unusual events" are not includable in the apportionment factor. Also new is a provision that the "reimbursement of expenses" is not considered business receipts, and therefore it is not included in the apportionment factor.

One interesting new example provides that a corporation in the business of buying and selling stock investments, that sells stock to a third party at a gain, must include the gain from the sale in the apportionment factor, as determined under Tax Law 210-A because the transaction "is not an unusual event." However, the statute provides that net gains from sales of stock are not included in the factor unless necessary "to properly reflect income." Tax Law 210-A.5(a)(2)(G).

Apportionment on Combined Reports. The overriding approach taken by the draft regulations, similar to the existing regulations, is that the apportionment factor is computed as though the corporations included in the combined return are a single corporation. Thus, all intercorporate business receipts, income, gains, and losses are eliminated in computing the combined group's apportionment factor.

Qualified Financial Instruments. The draft regulations address the sourcing of receipts from qualified financial instruments ("QFI's"), generally defined as financial instruments that are marked to market. It makes clear that if a taxpayer has marked to market stock, then any other stock that has not been marked to market is also a QFI and similarly sourced. The draft also explains the taxpayer election to source QFI receipts to New York State using the 8% fixed percentage method. The draft regulations do not address the mandatory 8% sourcing provisions under the law, such as for net gains from sales of other financial instruments where the transaction is made through a licensed exchange.

Receipts from Loans. Among other things, the draft regulations clarify that interest income from loans not secured by real property is sourced based on the borrower's location at the time the loan is originated.

Marked to Market Net Gains. The draft regulations provide that marked to market net gains from stock and from partnership interests are not included in the apportionment factor unless necessary to properly reflect business income.

Receipts from Credit Cards and from Credit Card Processing. The draft regulations go into some detail regarding the sourcing of receipts received by "credit card processors." For the most part, the draft sources such receipts to New York based on the percentage of the processor's "access points" in the State, which are defined as the physical location at which the processor's customers access the processor's network.

Receipts from the Sale of Advertising. Advertising activities are defined to include "the sale of space on a Web page, regardless of the method of compensation paid by the advertiser." The draft regulations also provide for an "intended target fraction" to be used to source advertising receipts, the numerator of which is the number of intended targets of such advertising and the denominator of which is the total number of intended targets. This ratio is based primarily on statistics and information compiled or utilized as part of the taxpayer's market research and advertising strategy developed for its customer.

As with its prior releases of draft Article 9-A regulations, these draft regulations have not yet been formally proposed under the State Administrative Procedure Act. The Department is inviting comments by December 28, 2016.